VAT specialist Melanie Lord examines how different Brexit scenarios could impact on VAT and duty, and what companies can do to plan for each eventuality.
While it is unclear if the UK will have a soft or hard Brexit, what we do know is that a Brexit of almost any kind will affect how companies deal with VAT and duty.
Even without knowing precisely what rules we’ll end up with, there are only a finite number of possible alternatives. Some will radically change how VAT and duty are dealt with, others less so, but that doesn’t mean businesses should be sitting on their hands waiting for any Brexit deals to be thrashed out.
Here is what I think businesses could be usefully doing now to prepare:
1. Map out how all purchases and sales work in terms of geography and contracts
This needs to show:
- Where your customers and suppliers belong;
- Where the goods start off and end up;
- Who you buy from, and
- Who you sell to.
2. Use these maps to plot the different VAT and duty implications for each Brexit alternative
These all stem from having a customs border of some description between the EU and the UK leading to VAT and duty being due on imports. The main Brexit alternatives seem to be:
• Soft Brexit
Where the UK leaves the EU but stays in the EU Customs Union (EUCU). You could then buy and sell goods with other EUCU members without paying duty, resulting in little change to current real costs. The outcome should be similar using the European Economic Area or European Free Trade Agreement models, but these routes seem to be primed with political dynamite and are perhaps least likely.
• Medium Brexit
Where the UK leaves the EUCU but puts some individual agreements in place. While these might help they would take time to sort out, and almost certainly result in UK importers paying VAT (and possibly duty).
• Hard Brexit
Where the UK has no trade agreement the World Trade Organisation rules would apply, so a customs border is created between the UK and everywhere else. UK importers would then pay VAT and duty on all imports of goods.
3. Each scenario map should help you recognise pinch points which you should work on to find the best strategy.
This should take into account:
- Current intra-EU supply chains that might need to be re-configured;
- The cash flow impact of paying VAT on incoming non-UK goods;
- The real cost of paying duty on purchasing EU goods;
- Increased administration in having to file a lot more import declarations;
- The impact of your non-UK customers having to pay VAT and duty on their purchases from you, and
- As a non-EU business the way you claim VAT paid in EU countries being changed.
Although we won’t know how this is all going to work for a while yet, that’s no excuse for doing nothing. If you have a strategy for dealing with each possible outcome, you can hit the ground running instead of getting left behind.
Has your company mapped out a Brexit strategy for VAT, duty or other areas?